Direct indexing is a strategy that involves purchasing the individual stocks that make up an index, rather than buying the index fund or ETF to track that same index. This allows investors to have index-like returns while increasing tax-loss harvesting opportunities through ownership of individual stocks. 

Even if an index (like the S&P 500, for example) has a positive return for the year, individual components of the index may have had periods of negative returns. Owning each of the individual stocks presents tax-loss harvesting opportunities that may have not been available if just the index fund or ETF was owned. This process can add up to around 1% in additional after-tax returns, according to a recent research report by Vanguard.

Realizing losses in a non-retirement account has several benefits. Losses can be used to offset any capital gains, and up to $3,000 per year can be deducted against ordinary income for tax purposes. Any remaining amount can be carried forward until fully used in future tax years. 

Further customization:

An added benefit to direct indexing is the ability to customize the stocks in your index. Say you work at a big tech firm and want to exclude that company’s stock from your portfolio, the index has no problem with removing that stock. 

Or say you want to add a screen for specific ESG (Environmental, Social, and Governance) mandates, customization allows for that, too. 

Questions? Do you feel like a direct indexing strategy might be right for you? Feel free to reach out and we’ll answer any questions you have.

Disclosures:

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.